Interest Rate Rise: Time for landlords to fight or take flight?

Chris Norris, NRLA policy director on what the interest rate rise could mean for landlords, as the NRLA calls for pro-growth tax policies to encourage landlords to remain in the sector

The Monetary Policy Committee recently voted to increase interest rates from 1.25 to 1.75 per cent, biggest single hike for 27 years.  

On the one hand, a 50-basis point rise is a big deal. It means that every £100,000 of debt costs an extra £500 per year to service. Put another way, a typical member of the NRLA with two or three properties owes on average £330,000 and could face an extra £1,650 in interest payments because of the bank’s decision this week.  

However, context here is crucial. Most landlords, being interested in the long-term and always on the lookout for a good deal, fix their BTL mortgages for either two or five years.

At present only around a third of NRLA members have fixed or variable rate products, a large proportion of whom were already looking to lock in low rates before the recent hike.

So not every landlord is likely to see the cost of servicing their credit rocket overnight. 

Similarly, 1.75 per cent remains an historically low rate. The average UK base rate over the last 25 years, roughly the same period mainstream BTL loans have been available, was just over 4 per cent. 

So, nothing to be concerned about?

Not quite.  

This is very unlikely to be the final rise this year, especially with inflation forecast to hit 13.1 per cent. The Bank of England may well follow the example of the US Federal Reserve in hiking rates to 2.5 per cent or beyond and, whilst this would still be well below the rates of 4-5 per cent common in the noughties, one crucial factor has changed – to the detriment of landlords.  

Of course, BTL interest was once considered a legitimate business cost and could be deducted from taxable income.

This was prior to George Osborne’s 2015 attack on landlords’ finances. Landlords were somewhat sheltered from some of the financial shock associated with interest rate hikes, and crucially protected our bottom-lines.  

Without the ability to off-set finance costs (for landlords who own property personally, not via a limited company) higher interest rates will eventually eat into margins and will increase pressure on landlords to either increase rents or look elsewhere for a viable investment. However, the operative word here is ‘eventually’. 

Resilient landlords 

NRLA members are nothing if not resilient. In a recent survey 86 per cent told us that a 50-basis point hike would affect profits but not force any sales.  

In fact, this polling strongly suggests that the base rate would have to reach three to five per cent before significant numbers of landlords would consider disposing of property or leaving the market altogether. Although mitigating action would certainly be required in the meantime.  

What should landlords be doing? 

In the short-term, nothing drastic. The base rate remains historically low, as do available product rates.

Some landlords may choose to look at the structure of their business and holdings to see if converting to a limited company structure would be advantageous*, although professional advice should always be sought in such matters, and it will not be suitable for all.

Longer-term, the Government must act. We need to convince the next Prime Minister and his or her cabinet that the hostile treatment of private landlords and unjust way in which we are taxed at present will not only hurt our industry but add to the cost-of-living crisis as the price of accommodation rises to cover landlords.

It is essential landlords have the confidence to remain in the sector.

Data consistently shows demand for privately rented properties is increasing in many areas, outstripping the supply of rented homes available.

With 23 per cent of landlords planning to sell off homes in the next 12 months, action is needed now, to prevent rents rising further and council waiting lists growing ever longer.

The NRLA is calling on the next Prime Minister to take steps to encourage investment to meet the rising demand.

We want to see the additional stamp duty levy on the purchase of homes to rent to be scrapped, and a number of other fiscal policies.

In fact, experts at Capital Economics estimate that removing the stamp duty levy alone would see almost 900,000 new private rented homes made available across the UK over the next ten years.

What is the NRLA doing?

As we enter the final few weeks of the Conservative Party leadership race, the NRLA has written to the two leadership candidates’ campaigns teams, stressing the next Prime Minister must address the supply crisis in the private rented sector as a matter of urgency.

We will also shortly ask  for members’ help in lobbying policy makers. We will also request that they contribute  to original research on this issue. Please keep up to date via our website here.

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